Thursday, March 24, 2011

EU to boost aid fund by June, Portugal clouds summit

EU to boost aid fund by June, Portugal clouds summit(Reuters) - European leaders agreed on Thursday to increase their financial rescue fund to the full 440 billion euros by June, but avoided discussion of Portugal which is under pressure to seek a bailout following the resignation of its prime minister.

Having said for weeks that they would agree a "comprehensive package" to tackle the euro zone debt crisis by the end of March, the leaders ended up delaying a final decision on boosting their safety net until mid-year.

That agreement at a two-day summit in Brussels was lauded as an accomplishment by Herman Van Rompuy, the president of the European Council, but worries about Portugal's political crisis overshadowed the meeting.

Prime Minister Jose Socrates quit on Wednesday after parliament rejected new austerity measures that he had hoped would allow the country to avoid following Greece and Ireland in needing to ask for EU/IMF financial assistance.

He is the second euro zone leader to fall victim to the rolling sovereign debt crisis after Ireland's prime minister was booted out of office last month.

Despite stepping down, Socrates came to the two-day summit and was warmly received by other leaders, diplomats said.

He resisted pressure from his peers to accept a bailout, however, and made it clear that he would hold that line, at least until a new Portuguese government is formed -- probably after early elections in about two months' time.

The fall of the government prompted Fitch to cut Portugal's credit rating by two notches to A-, saying risks to the country's financing had risen after parliament failed to pass fiscal consolidation measures.

The ratings agency warned further downgrades were likely in the next three to six months in the absence of a "timely and credible" EU/IMF support program.

European Central Bank President Jean-Claude Trichet told reporters as he left the summit that it was crucial for Portugal to stick to the fiscal austerity measures Socrates had proposed.

EU diplomats said Socrates had privately reassured other leaders that no matter what sort of government emerges after new elections, it would stick to the austerity program.

The Portuguese upheaval underscored the wealth of political obstacles the single currency bloc faces in trying to solve a debt crisis that has deepened over the past year.

Only a few days ago, the summit had been expected to deliver a full package that would reassure financial markets, but Thursday's decisions fell short of what some investors had expected only a few days ago.


Senior euro zone officials said Portugal was likely to need 60-80 billion euros in assistance from the EU rescue fund and the International Monetary Fund. No talks have begun yet and will anyway have to wait until a new government is formed.

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